When you explore the many types of mortgages that are available, one option you might come across is an FHA adjustable-rate loan. It can allow you to buy a house if you don’t meet a conventional lender’s criteria, but there are downsides to consider.
What Is an FHA Mortgage?
The Federal Housing Administration offers mortgages that only require a 3.5% down payment. The FHA has minimum credit score requirements that are less stringent than those of conventional lenders. FHA mortgages can make homeownership possible for borrowers who might not get approved anywhere else.
With an FHA loan, a borrower must pay mortgage insurance premiums for the life of the loan. Those premiums might add hundreds of dollars per month to the total cost of homeownership.
How Does an Adjustable-Rate Mortgage Work?
An adjustable-rate mortgage, or ARM, has a fixed interest rate for an initial period. That might be one year, three years, five years or even longer in some cases. The fixed rate at the start of an ARM might be significantly lower than typical interest rates for fixed- rate mortgages.
After the fixed-rate period ends, the interest rate is reset periodically, usually every six or 12 months. The interest rate fluctuates based on economic conditions, which means the rate might go up or down. There are limits on how much the interest rate can change each time it’s reset and how much it can change over the life of the loan.
What Are the Pros and Cons of an Adjustable-Rate Mortgage?
Having a low interest rate locked in for a while can be appealing, but many homeowners find it stressful to not know what their interest rate and monthly payment will be in the future. Some people take out an adjustable-rate mortgage, then refinance and switch to a fixed-rate loan before the interest rate on their ARM resets.
An adjustable-rate mortgage can be a good choice for a borrower who doesn’t plan to own a house for a long time. A borrower can take advantage of a low introductory fixed rate, then sell the house before the interest rate changes.
Is an FHA Adjustable-Rate Mortgage Right for You?
If you’ve been turned down by conventional lenders, an FHA mortgage might be your best or only option. Mortgage insurance premiums will add to your monthly housing costs, but you might decide that the extra expense is worth it.
The FHA offers both fixed-rate and adjustable-rate loans. Having predictable monthly payments can give you peace of mind, but you might prefer to have a lower rate at first and refinance later. If you’re planning to sell the house before your rate changes, then you won’t have to worry about a potential spike in your monthly housing payments. Your unique financial circumstances will determine what types of loans you’re eligible for and what terms you’ll be offered. Explore a range of mortgage types and get quotes from several lenders so you can make an informed decision.
